Structuring Salaries is an inevitable task for every HR and Payroll professional.

Despite the importance of the activity, professionals

are often uninformed of the technical and best practices of a drafting a complete and efficient salary structure.
Being Indias leading payroll platform, our clients often quiz us on the how to frame the perfect salary. Hence, we thought it would
be a good idea to create an informative guide on how to ideally structure a salary. Through this article, well look at the various
components of a salary, what they mean and how you can use them effectively.

Component

Tax Deduction

Is PF
Applicable?

Is ESIC
Applicable

Part of
Gratuity

Minimum
Amount

Basic

Fully Taxable

Yes:

Yes

Yes

As per
Minimum
Wages

DA

Fully Taxable

Yes

Yes

Yes

As per
Minimum
Wages

Medical

Rs. 1,250 a month or Rs.

15,000 a year

No

Yes

No

None

Conveyance

Rs. 1,600 a month or Rs.

19,200 a year

No

Yes

No

None

HRA

Tax Exemption subject to the

minimum of the following 3
conditions
1) Actual HRA
2) 50% of Basic + DA if Metro
or 40% of Basic + DA if non
metro
3) Total Rent 10% of Basic

No

Yes

No

Varies
Depending
on the
state

LTA

As per actuals of the fare

expenses on leave travel

No

Yes

No

None

Children
Education
Allowance

Rs. 100 monthly for each child

up to 2 children

No

Yes

No

None

Children
Hostel
Allowance

Rs. 300 monthly per child for

up to 2 children

No

Yes

No

None

Mobile &
Telephone
Reimbursement

Actual expenses incurred on

one mobile phone and one
landline

No

No

No

None

Car

Rs. 1800/- p.m. in case Cubic

No

No

No

None

Component

Maintenance

Tax Deduction

Is PF
Applicable?

Is ESIC
Applicable

Part of
Gratuity

Minimum
Amount

Capacity of engine is 1.6 litres

or else Rs. 2400 p.m.

Driver Salary

Actuals of drivers salary up to

Rs. 900 monthly

No

No

No

None

Books &
Periodicals

Actual expenses

No

No

No

None

Special

Fully Taxable

No

Yes

No

None

Deductions, when applied to the CTC give you the actual take-home salary that an employee gets. Here are some of the most
common deductions:

Deductions

How is it calculated?

Whom does it apply to?

Provident Fund

Employer and Employee each contribute

Contribution 12% of Basic + DA + Special

Companies that have more than 20 or more employees. It

is mandatory for employees whose Basic+DA + Special is
less than Rs. 15,000 a month

ESIC

Employer Contribution is 4.75% of Gross

Salary; Employee Contribution is 1.75% of
Gross Salary

If a company has 20 or more employees who have a gross

salary of less than Rs. 15,000 a month, then it is
applicable to all those employees

Professional
Tax

Varies from state to state

All employees of applicable states

Labour Welfare
Fund

Varies from state to state

All employees of applicable states, that might depend on

designation

Objectives of the perfect salary structure

While creating the ideal salary structures, there are three things you should keep in mind
1. It should be tax efficient: This means that it should give employees the opportunity to save as much tax as
possible. Salary amounts should be divided into components giving the employee the opportunity to avail as
much tax deduction as possible.
2. Reduce the employers liability: The salary structure should reduce the liability of the employer. The
employers contribution to PF, Gratuity etc. should be kept as low as possible.

3. It should be compliant: Compliance norms like minimum wages and PF laws should be kept in mind while
drafting the salary structure.
Performance appraisals can be time consuming which also attaches a certain cost to it. Hence, larger companies with a
greater number of employees may not find shorter appraisal cycles very appealing. When deciding your appraisal cycle,
keep in mind the time and costs associated with it.
A deeper look into each component
Lets take a deeper look into the various components that make a salary. What do they mean and how are they
calculated?
1) Basic Salary + Dearness allowance
The Basic component is the primary component and the core of the salary structure. It is usually the largest component
of the CTC making up for 40-45% of the total CTC. The basic plays an important role in defining the salary as other
components like Provident Fund, Gratuity and ESIC are dependent on it.
Dearness Allowance (DA) was introduced as part of the salary as a means to reduce the burden of inflation on salaried
employees. This amount is usually set to about 5% of the total CTC and like the Basic component it also has an effect on
PF, ESIC etc.
You should keep the following in mind while setting the amounts for Basic and DA:
1. If its too high, it will increase the tax liability of the employee since this component is fully taxable. It also
affects the liability of the employer since higher contributions would be required for PF, ESIC etc.
2. If its too low, then you may not be able to meet the minimum wage norms set by the respective state
government. Since minimum wages are updated regularly, you would run the risk of falling below the
recommended wage limit.
2) House Rent Allowance (HRA)
The House Rent Allowance, as the name suggests is a component that employees can leverage if they are living in rented
accommodations. The amount that you can claim as tax deduction under HRA cannot be more than 50% of your basic in
a metro or 40% of your basic in a non-metro. Hence, depending on where your workplace is located, this salary
component will usually be set at 40% or 50% of the basic salary.
3) Leave travel allowance (LTA)
Leave travel allowance (LTA) remunerates employees for their travel within the country. This component is widely used
by employers due to the tax benefits associated with it. An employee can claim tax benefits for the fare expenses paid
for his/her family when they take a holiday. However, there are restrictions to what you can claim as tax benefits:
1. Only fare expenses are covered: Only the travel fare expenses can be claimed. Stay and food on your trip arent
covered.
2. Travel must be within India: If you travel to a foreign country, the expenses arent tax deductible. Only travel
within the country is covered.
3. What counts as family: Immediate family that are mainly dependant on the employee are covered under LTA.
3

4) Conveyance Allowance
The conveyance component of the salary structure is paid to employees for their travel expenses between their homes
and workplaces. The maximum amount that is tax deductible under this component is Rs. 1,600 a year or Rs. 19,200 a
year. Hence, this is also the recommended limit that most organisations would use for conveyance allowance.
Its also important to note that this component is only tax deductible if an organisation does not have its own means of
transport for employees. If the organisation has made arrangements to ferry employees to and from work, then
conveyance allowance cannot be claimed for tax benefits.
5) Medical Allowance
Medical allowance is paid as a reimbursement for medical expenses borne by employees. This amount is tax deductible
up to Rs. 15,000 a year or Rs. 1,250 every month. In order to claim tax benefits under this component, employees need
to submit proof of their medical expenses.
In case the Rs. 1,250 isnt claimed in one month, then this amount is carried forward to the next month. This means that a
cumulative amount of Rs. 15,000 can be claimed at the end of the year. This is also the recommended amount that
organisations usually allot to this component of the salary structure.
6) Child Education Allowance
This component is paid out towards tuition fees of employees children and is tax deductible up to Rs. 100 every month
for a maximum of two children. Hence, this amount is usually set to not more than Rs. 2,400 a year for an employee.
7) Special Allowance
Special allowance is the balancing component of the salary structure. It is usually used by organisation as the leftover of
the CTC when the rest of the components have been paid out. This component is fully taxable and is also taken into
account for the calculation of Provident Fund.
Deductions
Deductions are elements of the salary that are part of the CTC but are deducted from the in-hand salary that employees
receive. Lets take a deeper look at some of the most common salary deductions and what they mean.
1) Provident Fund
Provident Fund (PF) is calculated at 12% of Basic + DA + Special Allowance. The employer and the employee both
make an equal contribution of 12% each. This is applicable to companies who have 20 or more employees on their
payroll. If an employees Basic + DA + Special Allowance are less than Rs. 15,000 then it is mandatory for Provident
Fund to be deducted. Other employees can opt out by filling form 11 or can choose to have PF deducted on the ceiling
of Rs. 15,000 which would be Rs. 1,800 monthly.
You can find all the information you need about Provident Fund in our in-depth article.
2) Employees State Insurance Corporation (ESIC)

Deductions towards ESIC are mandatory for employees whose gross salary is not more than Rs. 15,000. It is only
applicable in companies where there are 20 or more employees within the Rs. 15,000 gross salary bracket. Employees
have to make a contribution of 1.75% of the gross salary and employers have to make a contribution of 4.75% of the
gross salary.
3) Professional Tax
Professional tax is the tax levied by Governments of certain states on salaried employees. The states where professional
tax is applicable are Karnataka, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu,
Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, and Sikkim.
The amount of profession Tax that is deducted varies from state to state where they are applicable.
4) Labour Welfare Fund
Labour Welfare Fund, as the name suggests, is a contribution made by salaried employees for the benefit of the labour
class. This contribution is applicable in the states of Karnataka, West Bengal, Maharashtra, Andhra Pradesh, Kerala,
Goa, Delhi, Punjab, and Haryana & Madhya Pradesh.
The contribution amount varies from state to state and is relatively small. The employer and the employee both make
contributions and the employer pays approximately twice the employee contribution. The payments are made semiannually in the months of June and December.
Like Professional Tax, Labour Welfare Fund contributions also vary from state to state where they are applicable.

Whats the ideal salary structure?

So whats the best way to draft salary structures? To answer this, weve put together a table of the common components
that make up a salary. Weve also added recommended amounts to each component that should assist you in drafting an
ideal salary structure.

Component

Recommendation

Basic

40-50% of CTC

DA

5% of CTC

HRA

50% of Basic + DA if metro and 40% if non-metro

Conveyance

Rs. 1,600 a month

Medical

Rs. 1,600 a month

LTA

No real benchmark, can even be used as a plug, but if not can set as 10% of Basic

Component

Recommendation

ESIC

6.5% of Gross Salary

Special

Usually used as a balancing component

Provident Fund (Employer)*

12% of Basic + DA

Provident Fund (Employee)

Rs. 1,600 a month

Professional Tax

As per statewise slabs

Labour Welfare Fund

As per statewise slabs

*Note 1: The PF Employer Contribution also bears additional administrative charges

*Note 2: Feel free to use components like Child Hostel and Child Education; since they are
small, we have ignored in our structure
For higher income employees:
You can use Mobile, Driver Salary, Books and Periodicals and Car Maintenance
You can set these amounts based on what you think the expenses of that employee would
be, keeping in mind the exemption limits for Drivers Salary and Care Maintenance